In January, the Retirement Systems of Alabama (RSA) released
its Comprehensive
Annual Financial Reform (CAFR) for the 2013 fiscal year. The report was
received with little fanfare. During an election year, no politician wants to
run afoul of the RSA and the billions it invests in Alabama.

Unfortunately, this head-in-the-sand approach to public pension
accountability is not working, and it will have painful consequences for Alabama's
future. While state politicians have made needed adjustments to the state retirement
system over the last several years, they have left the defined benefit
structure of the RSA intact.

According to the Bureau
of Labor Statistics, only 68 percent of U.S. workers have any access to
retirement benefits and only 28 percent have access to a defined benefit
pension plan like those provided through the RSA.

Traditional defined benefit plans are on the way out. Employers
and governments, especially in the case of public pensions, are realizing the unsustainable
burden of guaranteeing these pensions regardless of market conditions or
investment performance.

Warning signs are easily visible in the RSA's most recent
CAFR. First, Alabama's Teachers' Retirement System, Employees' Retirement
System and Judicial Retirement Fund are 66.5, 65.7, and 61.6 percent funded, respectively.
These are the current percentages of the amount necessary for the RSA to pay retirement
obligations to current and future retirees.

The trajectory of the pension plans is not particularly rosy
either. RSA's investment income was almost nine percent less ($395 million) in
fiscal year 2013 than it was the prior year. Even as markets recover from the
recent recession, RSA's unfunded pension liabilities increased from 2011 to
2012 in the state's two largest retirement plans. More importantly, the State
of Alabama paid an annual required contribution just shy of $1 billion for
fiscal year 2013, a return to increasing state payments after a sharp decrease
in 2012.

Before anyone cries foul for asking state employees and
retirees to shoulder the burden of pension reform, the discussion should start
with one caveat: Promises made to current state employees and retirees must be
kept.

Alabama's leaders have hopefully learned from the painful example
of Prichard, where the city's pension fund ran dry and retirees stopped
receiving checks they expected. The problem is that Alabama needs a modern
employee retirement system that avoids making grand political promises it may
struggle to keep in the future.

The good news for Alabama is that plenty of states have
provided examples of solid alternatives. A number of states have turned to cash
balance plans or hybrid plans that combine elements of individual retirement
accounts and defined benefit plans.

As of September of 2013, the National Association of State
Retirement Administrators reported
that 16 states administered these types of plans as either a mandatory or
optional primary retirement benefit for some or all of their state employees.
Importantly, these states run the political gamut from conservative Georgia and
Texas to more liberal Oregon, Rhode Island and Washington.

These changes may well mean a different retirement landscape
for future state employees, but these are exactly the same realities faced by
the average employee in Alabama required to guarantee the state's current public
retirement system with their tax dollars.

Public pension issues are challenging to handle, but they are
more effectively addressed by choice than by fiscal requirement. If Alabama's political leaders exercise
political courage in the short term, the state could avoid significant pain in
the future.

(Cameron Smith writes a regular column for Alabama Media Group. He is vice president and general counsel for the Alabama Policy Institute, an independent, non-profit research and education organization dedicated to the preservation of free markets, limited government and strong families. He may be reached at camerons@alabamapolicy.org or on Twitter @DCameronSmith.)

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